Monday, March 23, 2009

This Is What The Financial Industry Waited For?

Treasury Secretary has announced his latest effort to try and create a program that deals with the toxic assets on the books of lenders. It still puts the onus of moral hazard on the government and taxpayers are on the hook for all the money should the valuation be off.
Under the new so-called "Public-Private Investment Program", taxpayer funds will be used to seed partnerships with private investors that will buy up so-called toxic assets backed by mortgages and other loans.

The goal is to buy up at least $500 billion of bad assets -- such as subprime mortgages that are now in danger of default. Doing so would help cleanse the balance sheets of many of the nation's largest banks, which continue to suffer billions of dollars in losses.

The government will then run auctions between the banks selling the assets and the investors buying them, hoping to effectively create a market for these assets.

To kickstart things, the administration said it will commit $75 billion to $100 billion and would consider how the program is progressing before committing more money.
So, this version "only" commits $75 billion to $100 billion in the first wave, as thought that's nothing to sneeze at.

It's no wonder that there are quite a few pros who are balking at the latest plans and think they're going to make the problem worse.

The biggest problem is that the government has repeatedly failed to figure out a reasonable valuation for banks involved in this crisis. While some experts think that due diligence is the key to the success of this program, the government has repeatedly shown that it has avoided doing due diligence throughout this entire crisis.

The Bush Administration pushed bailouts without taking the time to assess whether the money was going to the right portion of the market - lenders or borrowers and whether they were the right parties to even receive money given that they were in essence rewarding bad behavior. The bailouts shifted the risk of loss from the businesses and bad business decisions onto taxpayers, which any business would applaud simply because they no longer have to worry about making bad decisions since the government was backstopping their downside. It was precisely the wrong message to send to the markets.

It fosters still more fiscal irresponsibility.

Then, you've got the failure of the government to properly value major banks like Citigroup or Wachovia or Washington Mutual.

At the same time Congress keeps pushing confiscatory taxes that would hit the heart of the financial industry in NYC, destroying the local economy. I don't think that is change that Mayor Mike Bloomberg or Gov. David Paterson can believe in because they are heavily reliant on Wall Street to fund all the tax and spend programs - and therefore require higher taxes from those very folks and industries (along with everyone else through sales tax that are going to hit folks who can least afford it during a recession.

Paul Krugman notes the voodoo economics coming from the Obama Administration and Tim Geithner over the latest bailout plan. He correctly notes that the math just doesn't add up. I can't believe that I'm citing to Krugman again, although using one of the most influential lefty economists to bash Obama's economic plans does provide me with some entertainment.

Bank of America's top management was calling on investors to sell after today's rally because there's going to be less profits in the sector. And more government intrusion and domination over compensation and all other aspects of the industry, regardless of their actual necessity or constitutionality.

So, what was the reason for today's big jump in the DJIA? Was it because of Geithner's do-over or was it the better than expected real estate sales figures? It was probably a bit of both, although the real estate sales has a larger effect since it was done without direct government intervention - real estate prices have come down and result in more affordable homes to people who can pay for them.

Henry Blodget slams Geithner's latest attempt to repackage the trash train that is the toxic paper. He offers up the five myths about the toxic paper crisis that people don't quite get based on the media coverage. Top among them is that the banks aren't lending. They are lending, but just to those people who they think will repay their obligations. In other words, they're no longer providing the free and easy credit to subprimes. That's the area of the market that the Administration wants to see turbocharged, even though it was a prime player in the real estate and market meltdown.

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